Calypso Canvas makes canvas window awnings. You have been asked to predict the potential effects of some proposed company changes. The following information is available:
Variable cost per unit
Direct material ……………………$18.40
Direct labor ………………………. 13.00
Production overhead ………………. 8.60
Selling expenses …………………… 4.60
Administrative expenses …………… 3.00
Annual fixed cost
Production overhead ……….. $1,200,000
Selling ………………………. 960,000
Administrative ……………… 480,000
The selling price is $94.00 per unit, and expected sales volume for the current year is 150,000 units. Following are some changes proposed by various members of the company.
1. Engineers suggest that adding color accents to each unit at a cost of $14.40 would increase product sales by 20 percent.
2. The sales manager suggests that a $520,000 increase in advertising will increase sales by 15 percent.
3. The sales force believes that lowering the price by 5 percent will increase demand in units by 10 percent.
a. Compute the current break-even point in units and dollars.
b. Compute the current margin of safety in dollars, in units, and as a percentage.
c. Compute the independent effects on profit and dollar break-even point of each of the suggestions. For each proposal, advise company management about acceptability.